2022 (7) TMI 434 - AT - Income Tax

Tribunal rules in favor of assessee, upholding reassessment validity and non-taxability of development charges.

The Tribunal upheld the validity of reassessment proceedings, ruling that they did not breach natural justice principles. Additionally, the development ... Reopening of assessment u/s 147 - addition of development charges and TDR deposits violating the principles of mutuality - basic allegation against the assessee was, assessee society received Development charges and TDR deposits through developers as mentioned in assessment order - As during the referred year i.e. F.Y. 2010-11 relevant to A.Y. 2011-12 there is increase from F.Y. 2009-10 to F.Y. 2010-11 in reserve fund and the income was not offered for the taxation - HELD THAT:- The doctrine of mutuality, based on common law principle, is premised on the theory that a person cannot make a profit from himself and amount received from oneself, cannot be regarded as income and taxable under section-4. The essence of the principle of mutuality lies in the commonality of the contributors and the participants who are also the beneficiaries. The contributors to the common fund must be entitled to participate in the surplus and participator in the surplus are contributors to the common fund. The law envisages a complete identity between the contributors and the participants in this sense. Any surplus in the common fund shall therefore not constitute income but will only be an increase in the common fund meant to meet sudden eventualities and liabilities. In CIT, Bihar Vs. M/s Bankipur Club Ltd. [1997 (5) TMI 392 - SUPREME COURT] considering the surplus of receipts over expenditure generated from the facilities extended by a club to its members and its exemption from tax on principles of mutuality. In the present case, the facts are not in dispute the assessee is a Cooperative Housing Society formed of plot owners who had obtained a lease of land from the Maharashtra Housing Board. The society looks after the maintenance and infrastructure. If any members desire to avail of the benefit of transferable development rights for carrying out construction or additional construction on his plot, the member has to pay certain premium to the society. AO is of the view that TDR premium is charged by the society from its member but paid by the developer on members behalf to permit them to commercially exploit the potential for the development of the plot; whereas in reality it was a profit sharing arrangement of the commercial nature. The admitted facts would indicate that the TDR premium is liable to be paid by a member of the Society who desires to utilize additional FSI in the form of Transferable Development Rights. The principle of mutuality would clearly apply to a situation as to the present. In the context of the payment of non occupancy charges by a member of a Co-operative Housing Society to the Society, a Division Bench of this Court held in Mittal Court Premises Co-operative Society Ltd. vs. Income Tax Officer [2009 (7) TMI 689 - BOMBAY HIGH COURT]' that the principle of mutuality would apply. The Division Bench noted that the object of the Society is to provide service, amenities and facilities to its members. Non-occupancy charges are payable by a member on account of the fact that the member is not in occupation of the premises. In our view, the same principle would apply to the present case. The TDR premium is a payment made by a member to the Society of which he is a member, as a consideration for being permitted to make an additional utilization of FSI on the plot allotted by the Co-operative Housing Society. The Society which looks after the infrastructure, requires the payment of the premium in order to defray the additional burden that may be cast as a result of the utilization of the FSI. The point however, is that there is a complete mutuality between the Co-operative Housing Society and its members. It is essentially clear that the receipts of the assessee are not chargeable to tax applying the doctrine of mutuality. As alleged by the AO that the payments have been made by the developer on assessees behalf is not material in the given circumstances. Just because payments had been made by the developer, doctrine of mutuality cannot be taken away from the assessee society. In our considered view amount of TDR deposit and development charges received for A.Y. 2011-12, for A.Y. 2012-13 & and amount of TDR Utilization Charges/TDR Premium and amount of development charges are not chargeable to tax on the concept of mutuality Based on above discussions and factual finding, if an assessee is entitled for the benefit under the doctrine of mutuality, no expense disallowed on ad-hoc basis can be added back to the income of the assessee. Issues Involved:1. Legality of reassessment under section 143(3) read with section 147 of the Income Tax Act, 1961.2. Taxability of development charges and TDR deposits under the principle of mutuality.3. Disallowance of revenue expenses on an ad-hoc basis.Issue-wise Detailed Analysis:1. Legality of Reassessment:The appellant challenged the reassessment under section 148 of the Income Tax Act, 1961, arguing that it violated the principles of natural justice. The Tribunal noted that the assessee did not object to the reopening of the case and participated unconditionally in the reassessment proceedings. The Tribunal found no violation of natural justice as the assessee had availed appropriate opportunities for submissions and arguments. Therefore, the ground of appeal regarding the reassessment was dismissed as infructuous.2. Taxability of Development Charges and TDR Deposits:The primary issue was whether the appellant society was entitled to the benefit under the concept of mutuality for the amounts received as development charges and TDR deposits. The Tribunal examined the doctrine of mutuality, which is based on the principle that a person cannot make a profit from himself, and amounts received from oneself cannot be regarded as income. The Tribunal cited the Supreme Court's decision in CIT, Bihar Vs. M/s Bankipur Club Ltd., which held that receipts for facilities extended by a club to its members are not taxable if they are not tainted with commerciality and are used for mutual benefit.The Tribunal found that the development charges and TDR deposits were paid by developers on behalf of society members, and the principle of mutuality applied. The receipts were used for the common benefit of society members, such as maintenance and infrastructure. The Tribunal concluded that the amounts received were not chargeable to tax under the concept of mutuality.3. Disallowance of Revenue Expenses:The Assessing Officer (AO) made an ad-hoc disallowance of 20% of the expenses due to the absence of supporting evidence. The assessee argued that since it operated on the principles of mutuality and did not claim any expenses against its income, no disallowance should be made. The Tribunal agreed, stating that if the assessee is entitled to the benefit under the doctrine of mutuality, no ad-hoc disallowance of expenses can be added back to the income. Therefore, the ad-hoc disallowances for the respective assessment years were not sustainable.Conclusion:The Tribunal allowed the appeals of the assessee, holding that:1. The reassessment proceedings were valid and did not violate the principles of natural justice.2. The development charges and TDR deposits received by the society were not taxable under the principle of mutuality.3. The ad-hoc disallowance of revenue expenses was not justified and could not be added back to the income of the assessee.Order pronounced in the open court on 7th of July, 2022.